fiduciary governance

Key Questions CFOs Should Ask Before Acquiring a Company

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A Fiduciary Advisor's Perspective:

When businesses look to acquire another company, one area that often gets overlooked during the due diligence process is the target company’s retirement plans. However, from a fiduciary standpoint, failing to properly assess this area could expose your company to significant liabilities.

As a fiduciary advisor, one of our core responsibilities is to help businesses navigate this complex area of mergers and acquisitions (M&A). Whether the transaction is an asset sale or a stock sale, understanding the status and structure of the acquired company’s retirement plan is crucial. Below, we’ll explore the key questions CFOs should be asking, why these questions are so important, and how to make informed decisions before the deal closes.

1. Is the Acquired Company’s Current Plan Compliant with ERISA Regulations?

This is arguably the most important question a CFO should ask. The Employee Retirement Income Security Act (ERISA) establishes strict requirements for the administration of Corporate Retirement Plans. A target company’s failure to comply could result in significant penalties and even lawsuits.

As a fiduciary advisor, we would conduct a thorough compliance review of the acquired company’s plan, looking at:

  • Plan documents
  • Past audits
  • Regulatory filings
  • Any history of penalties or compliance issues

Discovering compliance issues post-transaction can lead to costly fixes, audits, or penalties. Identifying these risks early helps the acquiring company decide whether to terminate the plan, keep it separate, or merge it with their existing plan.

2. What is the Plan’s Design and Structure?

Every retirement plan is structured differently, so it’s essential to understand the acquired company’s plan design. How do their vesting schedules, matching contributions, and loan provisions compare to your current plan? More importantly, do these features align with your company’s overall benefits philosophy?

Understanding the acquired company’s plan design can help avoid future complications. For example, if their plan offers benefits that are significantly more generous than your current plan, employees could feel upset about losing those benefits if the plans are merged. Conversely, if their plan is less generous, there could be participation issues down the road.

Questions around plan design should also touch on:

  • Participation rates
  • Any unique plan provisions
  • Contribution levels from both employees and the employer

As advisors, we would look for any areas where the plan may be out of sync with your current plan or industry best practices.

3. What are the Funding Status and Investment Options?

Next, you’ll want to ask about the financial health of the acquired company’s retirement plan. Is it adequately funded, and are there any unfunded liabilities? Underfunded plans could leave the acquiring company with the burden of making up the shortfall, especially in stock sale situations where liabilities are inherited.

Another critical area is investment options. Does the target company offer a diverse, low-cost portfolio of investment choices? Are any of their funds underperforming or high cost? Merging your plan with one that offers inferior investment options could increase fiduciary risk.

As part of our role, we conduct an investment review to ensure that the plan’s options are appropriate and meet fiduciary standards. If the acquired plan’s investment lineup doesn’t pass our scrutiny, we’ll recommend steps for improvement or transitioning the plan into your current investment platform.

4. What Service Providers and Fees are Involved?

Retirement plan fees have become a significant area of scrutiny in recent years, with lawsuits and regulatory actions targeting high fees. Understanding who the acquired company uses for recordkeeping, advisory services, and custodial work—and how much they’re charging—is essential.

If the service providers are charging excessive fees, this could be a red flag. At the very least, these fees should be benchmarked against industry averages to ensure they are reasonable. Transitioning service providers can often come with penalties or disruption, so understanding those costs early can help you decide the best course of action.

As fiduciary advisors, we can assist in benchmarking fees and identifying areas where cost-saving measures can be applied without sacrificing the quality of service.

5. What Type of Transaction is It—Asset Sale or Stock Sale?

The type of sale—whether it’s an asset sale or a stock sale—will determine what happens to the acquired company’s retirement plan. In an asset sale, the buyer typically doesn’t assume responsibility for the seller’s plan. This often leads to the plan being terminated, and employees having the option to roll their assets into the buyer’s plan or an IRA.

In a stock sale, the buyer assumes both the assets and liabilities of the seller’s plan. This means the buyer could inherit any compliance issues, fiduciary breaches, or underfunded liabilities. In these cases, merging the plans or maintaining them separately becomes a crucial decision.

We work closely with CFOs to assess the risks of each scenario. If the transaction is an asset sale, we’ll guide you through the plan termination process, ensuring compliance and assisting with participant communications. In stock sale scenarios, we provide recommendations on whether to merge the plans or keep them separate, based on an in-depth risk assessment.

6. How Will Merging or Terminating the Plans Impact Employees?

The last key question is about the impact on employees. The acquired company’s employees may be accustomed to certain plan benefits that don’t align with your current retirement plan. Merging or terminating plans can create confusion or dissatisfaction among employees if not handled properly.

It’s essential to communicate clearly with employees about any changes to their existing plan. We help CFOs develop communication strategies that explain the benefits of any changes and ensure a smooth transition for all parties involved.

Conclusion

Acquiring another company involves more than just assessing their financials and operations. The company’s retirement plan represents a significant area of fiduciary risk if not carefully examined. By asking the right questions—and working with a knowledgeable fiduciary advisor—you can reduce liability, ensure compliance, and make decisions that benefit both your company and its employees.

If you’re in the process of acquiring a company and need help evaluating their retirement plan, reach out to us. We’ll help you conduct thorough due diligence and make informed decisions that align with your fiduciary responsibilities.

Have You Outgrown Your PEO?

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As a retirement plan advisor for small businesses, navigating the landscape of Professional Employer Organizations (PEO) can be both challenging and rewarding. While PEOs offer invaluable services for startups and growing businesses, there comes a time when your business might outgrow its PEO. Recognizing this milestone is crucial for your company’s evolution and can significantly impact your bottom line and employee benefits strategy.

Why Leave a PEO?

Perhaps, your journey with a PEO may have started because of the immediate benefits in HR management, employee benefits, payroll, and compliance support. PEOs offer the advantage of securing workers’ compensation insurance at lower costs and allowing small and mid-sized businesses to offer competitive benefits packages. However, as your business matures, pain points arise which might lead you to reconsider this relationship:

  • Cost Considerations: It can be difficult to assess the fees that you actually pay to a PEO for their services. Often times, the administrative cost paid to the PEO is significantly higher than the bundled cost to provide services. Comparing the cost to “rebuild” your PEO independently, you can often times find significant cost savings.
  • Desire for Control: As businesses expand, the need for customized HR and benefits solutions becomes apparent. Especially in competitive industries where competing for candidates is extremely difficult. PEO’s often times can’t keep up with benefits offered in the marketplace.
  • Vendor Selection: Partnering with a PEO means your choices for health benefits, workers’ compensation, and other services are often limited to the PEO’s selections. This results in poor vendor alignment and cost/benefit tradeoffs that limit choice and competitiveness.

Timing and Considerations for Exiting a PEO

Deciding to exit a PEO relationship requires careful planning and consideration of several key factors:

  • Tax Consequences: Exiting mid-year can potentially have tax implications, such as double-taxation on FICA and FUTA due to nontransferable employee wage bases.
  • Replacing Services: You will need to find alternatives for payroll, HR, compliance, and benefits administration. This might include hiring internal staff and partnering with new vendors.
  • Insurance and Benefits: Transitioning out of a PEO means securing your own workers’ compensation, health insurance, 401k and other benefits.
  • Timing is critical to make sure that all of your services are ready to go when you exit the PEO. Even one missing link can make an exit impossible and keep you in your contract for another year.

Assembling the Right Team

The good news is that experts can solve for all of these problems. Successfully transitioning away from a PEO requires assembling a team of experts to ensure a smooth changeover and continued compliance:

  • Payroll/HRIS Provider: An essential member of your transition team, a payroll/HRIS provider will ensure that your payroll and human resource information systems are seamlessly migrated and set up to support your company’s operations without interruption. The right provider will offer solutions that are scalable and customizable to your growing business needs, facilitating payroll processing, benefits administration, and compliance with labor laws.
  • Benefits Broker: An experienced broker can help you navigate the complexities of health insurance and other benefits to find the best fit for your company and employees.
  • Insurance Agents: For workers’ compensation and liability insurance, specialized agents can offer competitive options outside the PEO model.
  • Financial Advisor: A financial advisor can provide guidance on the tax implications of exiting a PEO and assist in restructuring your benefits and retirement plans to maintain or improve financial health.
  • HR Consultant: To fill the HR gap left by the PEO, an HR consultant can help establish internal HR functions tailored to your company’s specific needs.

Conclusion

Transitioning away from a PEO is a significant decision that impacts every aspect of your business, from financial planning to employee satisfaction. By carefully assessing the timing, preparing for the change, and assembling the right team of experts, you can ensure that this transition supports your company’s growth and long-term success. By embracing this change you can create a wealth of opportunity to create a custom benefits, HR and compliance strategy to help you compete for talent and add to your bottom line. 

For more information on how we’ve helped others in the past, click the link below. 

2024 Trends in Retirement Plans

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As we step into 2024, the world of retirement planning continues to evolve. It’s a great time to look ahead and understand what will guide us in improving retirement outcomes for our clients and their participants. This year, we expect to see a mix of familiar trends from the Secure Act 2.0 and new focuses on personalization and financial wellness. Also, we’re keeping an eye on how the economy will influence our strategies, especially with the upcoming election and the Federal Reserve’s actions against inflation. Here are the major themes we are working on this year:

1. Secure Act Updates

Changes continue to be implemented with the passage of the Secure Act 2.0. Some changes were delayed such as the Roth Catch-up requirement which will take place after 2025, however, there are some mandatory and optional that we are focusing on.

Long Time Part Time Employees.

Employers will now be required to allow long-time part time employees to defer into their 401k if they have worked at least 500 hours of service in each of three consecutive 12 month periods and have attained age 21. That requirement is reduced to two consecutive 12 month periods for plan years after 2025. Additionally, for plan years after December 31, 2024, 403b’s will be required to adopt these new provisions.

Matching contributions on student loan payments

Starting this year, Retirement Plans may treat certain student loan payments as plan contributions for the purpose of match contributions. This provision may mean that employees who make qualified payments on student loans can receive a match even if they were not able to contribute to their plan.

Emergency savings accounts linked to retirement plans

Starting in 2024 the Secure Act 2.0 allows for plan participants to make pre-tax payments to a linked emergency savings account up to $2500 and withdraw up to $1000 without penalty. Providing access to participants to emergency savings when they need it and still save for retirement could help alleviate the anxiety of saving in a retirement plan for lower income workers.

The Secure Act has many other provisions being implemented in 2024 as well. It is important that you discuss with your Administrator to ensure compliance.

2. Personalization

A key area of improvement in the defined contribution space is the increase in levels of personalization at the participant level. By using key demographic information already known by the plan and information received directly from plan participants, 401k and 403b providers can create personalized saving and investment plans for employees at scale. Our approach to personalization is to utilize a tiered approach depending on the level of engagement from plan participants.

Plan-level personalized reporting and engagement

Often times participants are disengaged or recordkeepers don’t have the necessary technological solutions for detailed personalized planning. When that happens, we are finding innovative ways to use readily available plan demographic data to create personalized reports. This strategy enables us to identify participants who need help, so we can proactively reach out to them.

Increased use of Managed Accounts for engaged participants

When participants are engaged and the recordkeeper has appropriate and cost-effective technology solutions, managed accounts can provide an advanced level of personalization for retirement savers. Managed accounts allow professional third-party management of a participants retirement account based on demographic data and input from engaged participants.

When utilizing managed accounts in a retirement plan it is essential to monitor the program to ensure that participants who are paying extra for the service receive additional value through personalization.

3. Focus on Financial Wellness

Technology improvements and engagement

In 2024, there’s a heightened focus on financial wellness within 401(k) and 403(b) plans. Technological solutions are playing a key role, offering sophisticated tools that provide a comprehensive view of an individual’s financial health, including retirement readiness. More providers are entering the market increasing engagement and reducing costs. These new tools are increasing engagement and helping participants create healthier relationships with their money.

Retirement Income hits the mainstream

There is a growing momentum for in-plan retirement income strategies. Plans are increasingly incorporating features that help participants transition their savings into a stable income stream for retirement, addressing concerns about outliving their resources. This shift underscores the evolving role of 401(k) plans from mere savings vehicles to comprehensive retirement planning tools.

As the retirement income market evolves, platforms and investment managers are creating innovative retirement income products at lower costs to benefit more participants.

4. Economic Disruption

The 401(k) landscape in 2024 is also navigating through economic disruptions. The influence of the Federal Presidential election is sure to be contentious and could potentially mean social and economic disruptions through the 2024 election season. 

Furthermore, the Federal Reserve’s efforts to achieve a ‘soft landing’ amidst economic uncertainty are crucial. The Fed’s monetary policies, aimed at stabilizing inflation while avoiding a recession, play a significant role in shaping the investment landscape. Participants and plan sponsors must stay vigilant, adapting their strategies to these evolving economic conditions to safeguard retirement assets.

Conclusion

The 401(k) and 403(b) landscape in 2024 presents both challenges and opportunities. Staying informed and adaptable is key to navigating this dynamic environment. Whether you’re a plan sponsor or a participant, understanding these trends is vital for making strategic decisions that secure a comfortable retirement.

Evaluating Your Fiduciary Process

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Evaluating Your Fiduciary Process

Believe it or not, an efficient retirement plan committee does not happen by chance. The “best practices” your committee upholds form the foundation for a prudent fiduciary process creating an opportunity for employees to pursue their retirement goals. Companies of any size can benefit from a consistent process and should consider implementing a few of the tips below.

Evaluate What’s Established

If you have a company 401k plan and you are on the retirement committee, then you are a plan fiduciary. As such, you have many duties and responsibilities to uphold to help support plan compliance to the benefit of your company and the plan participants.  This is a great opportunity. However, is there more you can do to help limit liability and create a track for retirement readiness?

It’s more than likely you have a process in place to monitor and manage the company retirement plan; but with this process in place, have you been able to:

  • Measure the success of your plan?
  • Evaluate provider relationships and plan services and fees?
  • Limit liability?

If this doesn’t evoke a confident answer, let’s take a step back and review how you can create a repeatable process.

Process, Process, Process

Creating a repeatable process can help limit liability by demonstrating that you have carried out your responsibilities properly by documenting the procedures used and the thought process involved to fulfill your fiduciary duties.[1] Additionally, a well put together and effective retirement plan committee is the foundation of successful fiduciary decision-making and organizational risk management for plans of all sizes.[2]

Choosing the right team

First things first, who is on your team? If you’ve assembled a committee team, it may include a business owner, CEO, CFO, President, Human Resources Managers, and/or other professional colleagues. Surprisingly, members of your retirement plan committee don’t need to be experts in retirement or investing; however, they should be committed to the task and have a reputation for making good decisions.2

Documenting

Within your team, you must delegate roles and begin documenting all plan actions and why they are prudent. Proper documentation serves as proof that the committee’s responsibilities are being prudently executed.[3]

Here are some of what the retirement plan committee’s minutes should include:3

  • List of all party’s present with identification of roles
  • Description of all issues considered at the meeting
  • Documentation of all materials reviewed during the meeting
  • Documentation of all decisions made and the analysis and logic supporting each

Identification of any topics to

The Prudent On-going Process

Once your committee is in motion, it’s time to start the on-going process of monitoring, reviewing, and evaluating information. When you review your company retirement plan, create a checklist of the following:

  • Gather all plan related documents
  • Create folders
  • Read through and understand the information
  • Ask team members to assist if needed

Once the delegated committee member has reviewed the plan, it’s time to evaluate provider relationships and plan services. Consider evaluating retirement readiness, plan administration, costs, investments, and service providers.

As your committee monitors the plan, ask yourself and the team members one important question: How could you make your company’s retirement plan offering better? Some suggestions could be fiduciary advisor investment review, fee benchmarking, auto enrollment, and auto escalation.

Maintenance within the Retirement Committee

Providing Fiduciary Training

As mentioned, your committee isn’t required to have retirement and investment experts. That being said, it is crucial to provide fiduciary training so they can be educated and fully equipped to serve on the retirement plan committee. Key areas to cover should include the definition of a fiduciary under ERISA, the basic duties and responsibilities required, fiduciary best practices, investment considerations and prudent process, and an overview of current legal and regulatory trends.[4]

How Often Should a Committee Meet per Year?

Industry experts suggest meeting 2-4 times per year: formal meetings should occur on a regular basis and should not take more than 1-2 hours if well-organized.4 Scheduling meeting at the beginning of the year tends to be effective for all parties.  One idea is to pre-schedule and put the placeholder dates on their calendars so you have the meetings calendared and set for the year.

Looking Forward

Why should you evaluate your fiduciary process? As retirement plan committee members, you want your employees to reach a successful retirement, so always focus on the outcomes. Additionally, having a compliant plan can limit your liability as a plan sponsor. Lastly, ERISA is about process! The committee needs to keep repeating, refining, and improving the company’s retirement plan; because at the end of the day, you want all of your employees to win at retirement.

 

[1] Department of Labor. “Meeting Your Fiduciary Responsibilities.”  DOL.gov, Feb. 2012.

[2] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

[3] Powers, Tony. “Documenting Retirement Plan Committee Meetings.” KerberRose Wealth Management, LLC, 11 July 2016. Web. 08 Aug. 2017.

[4] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

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